Management and Organizational Studies 2285 Lecture Notes - Lecture 2: Concentration Ratio, Vertical Integration, Product Differentiation

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MOS
LECTURE 2
ANALYZING GLOBAL INDUSTRIES
- Different countries have different comparative advantages
- Comparative advantage is relative what is a benefit to one firm may not be a benefit to another
Ex. Swiss are known for excellence in watch-making this is no benefit to car manufacturer
- Firms must understand how to determine relative comparative advantage
- Relative comparative advantage: the fit between firm needs and what the country offers which can differ
depending on each
- Internationalization can take the form of a lot of different operations
- What the firm needs depends upon why it is going, but more importantly, what is going to do there
- Fir comes from being able to get what the firm needs to do what it does from a given country
- PEST: political, economic, social and technological
Industry vs market
- Market excludes the industry
- Industry excludes the market
- Market:
What is the structure?
Who are the customers?
Where are they located?
What do they want?
What has to be done to get them to choose us?
- Industry:
Who are the competitors?
Who is strong/weak?
What do they do?
Where are they located?
What do they do there?
MARKET STRUCTURE
- Structure can be influenced by the cost to operate in given industry
High costs generally lead to monopoly, low to competitive
- Market determines what companies do
- Structure influences firm behaviour in terms of pricing and product differentiation
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- Market struture affets a atio’s relatie oparatie adatage…
Competitive: may or may not be difficult to differentiate but might provide acquisition target
Monopoly: may be impossible to enter but monopolists could be a great partner
Oligopoly: will face strong but limited competition
Market concentration
- Measure of the distribution of power among competing firms in an industry
High levels: power is concentrated in few hands
Low levels: power is more evenly distributed among firms
- Can be measured using sales, output, value added, assets, and employment
- Concentration ratio: taking the share of the largest firms (as many as useful) based on whatever measure you
deem important (ex. Sales, output etc)
- CR2 = concentration ratio of the 2 largest firms
- CR10 = concentration ratio of the 10 largest firms
- Herfindahl-Hirschmann index: calculated by summing the squares of the individual market shares of all the firms
in the market (more accurate because it includes all firms, but complete data are needed)
- Important to know to judge the strength of competitors and likelihood of success when entering markets or to
help decide who would be a good partner or supplier to help gain a competitive advantage
- This is a domestic market structure
PORTER’“ FIVE FORCE“
- Model is used to aalze the opetitie eiroet of a gie outr’s idustr
- Helps firms decide if the industry is one in which they can or would like to compete (if they are looking to
expand their market), and if it is a good place to operate (if they are looking for cost reductions)
- Ex. Efficiency drivers (market and industry analysis are different)
INDUSTRY RIVALRY
- Copetitio a e ased o poliies relatig to…
Price (but cartels and price leadership)
Product
Promotion
Place
- Or strategies relatig to…
Mergers and acquisitions
Innovation
- Competition intensity is a proxy for how hard it will be to find a market and/or how innovative the firms in the
industry may be
- Copetitio is ore itese he…
Large number of competing firms
Firms are of similar size/market share
Market is growing slowly
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Low product differentiation
Capacity added in large increments
NEW ENTRANTS
- New entrants increase the number of firms in the industry and increases capacity and competition intensifies
reducing the likelihood of sustainable profits
- If there have not been new entrants to the industry for a while, it may be monopolistic or oligopolistic situation
- Either ould e good or ad depedig upo the fir’s eeds ME or E
- Likelihood of new entrants depends on ature ad height of arriers to etr…
Absolute cost barriers
Product differentiation
Economies of scale
Excess capacity
Reaction of established firms
Extent of vertical integration
Contracts with suppliers or customers
BUYERS
- Whether customer buying power is a good or bad thing depends upon what position you will have in the
industry
If you are the seller = bad: you will not have the power to set prices and will face many
expectations that may reduce your profit
If you are the buyer = good: your costs will be lower because you will be able to push around your
suppliers
- You want to enter industries with high customer power if you are entering the country due to efficiency reasons
- Custoers hae poer he…
Number of customers is low
Customers see your products as undifferentiated
Customers earning good profits
Produts are ot sigifiat % of uer’s osts
Customers are able to integrate vertically backwards
SUPPLIERS
- Whether supplier buying power is a good or bad thing depends upon what position you will have in the industry
If you are the supplier = good: you will be able to set prices resulting in high profits
If you are a buyer = bad: your costs will be higher which will negatively affect profit
- You want to enter industries with high supplier power if you are entering the country due to market efficiency
reasons
- “uppliers hae ore poer he
Supply industry has small number of firms
Suppliers sell differentiated products
Suppliers are not threatened by ground-breaking new products
Suppliers are able to integrate vertically forward
Customers are not important to suppliers
SUPPLIERS
- Firms not only face competition from others in their industry but also from firms that offer similar
products/services that are different but provide the customer the same or a better outcome for a lower price or
with more ease of use or acquisition
- The threat of losing customers comes from how easy it is for them to switch to a substitute and how similar the
outcome will be
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